Monetary policy review – a tough turnaround
By Addmore Chakurira
THE much-awaited mid-year review statements on the budget and the monetary policy statement were unveiled early this w
As largely expected, there were no tremors as was the case late last year when authorities had “to apply urgent, generally regarded as unorthodox monetary measures, to arrest the melt-down in economic production which was fast engraving itself on the economy”.
Going forward, the authorities will act more on a supervisory level and give direction to the markets and hopefully no shock announcements are expected unless it’s absolutely warranted. The authorities seem to prefer giving the markets ample time to adjust as per their soundings.
Both the fiscal and monetary policy generally allude to a tight policy though a dual interest rate policy and the managed forex auction market still remain. Highlights from the budget include the limiting of unbudgeted subsidies to unavoidable situations, thereby curbing fiscal expenditure. Duty on selected essential medical and dental equipment was scratched as a result of the exorbitant medical bills. Duty on sanitary wears was also suspended.
To benefit from the duty slashing are commercial vehicles with duty coming down from 25% to 15% on commercial trucks and 60% to 40% on pick-up trucks. As has become the norm – something to cheer for the local guzzlers with a new cheap beer based on sorghum creating a ready market for sorghum in the process. Excise duty on sorghum beer will be 15% as opposed to 40% for barley-based beer.
The zero tax brackets for low-income groups will be increased from $200 000 to $750 000 per month with the income tax bands ending at $1,5m per month above which income will be taxed at 45% surcharge, effective September 1. However, the middle class remains compressed, as surcharge applies on income above $18 million per annum thus widening the gap between the poor and the rich. Though the increase in the low income tax bracket is a welcome development, the figure falls short of the poverty datum line projected at around $1 milliion. The tax relief to individuals will stimulate consumption. However, the demand outlook remains weak due to low corporate profitability and there is no visible decline in average selling prices year-to-date on most basic items.
The outlook for corporate profitability is uninspiring as capacity utilisation is still at the bottom end with some corporates shedding labour as they restructure. With the squeeze in disposable incomes a further slowdown in the already sluggish demand is looming. With a likely increase in consumer resistance to further price hikes combined with escalating input costs, most Zimbabwean companies (financials included!) will be faced with dwindling operating margins.
In a bid to contain the surge in money supply growth which stood at 400,3% in May, and the high inflation rate, the RBZ introduced some tight measures. These include maintaining a tough stance on overnight accommodation with penalty rates pegged at 10 to 20 percentage points above the ruling inflation rate and further increasing the statutory reserve ratio for merchant and commercial banks from around 50% to 60%. That said the government has not utilised its overdraft with the RBZ for the greater part of the year.
The first measure is intended to discourage borrowing from the RBZ by making the cost of borrowing from the central bank more expensive, thereby reducing credit creation. The effect of increasing the statutory reserve ratio will be to reduce the amount of money commercial and merchant banks lend and consequently lending rates should remain high, within the set targets of 10 to 20 percentage points above the inflation rate.
The inflation target of 200% is still in place and appears attainable with everyone’s support. Financial institutions are anticipated to increase investment and savings rates as the current margins (net interest income ratio) they are reaping have come under a barrage of criticism.
There is a school of thought that the results to be released by financials will reveal the zero-sum nature of the business with some at the extreme top end and others in the negative category. That said the “multiple” interest rate systems still remain in place though this is anticipated to converge to one rate in the coming year.
Inflationary pressures in the form of concessionary finance and the instruments to mop up excess liquidity, mainly the special TBs (“paper money”) still exist to some extend.
The managed forex auction system was maintained with a slight modification to the carrot and stick Export Retention Scheme. Effectively those who remit forex earnings within 30 days are allowed to retain 75% in FCAs and 25% goes at the ruling auction rate (except horticultural exports, which are on 10 days), prepayments are allowed 80% retention and 20% at auction rate. The diaspora rate was moved from $5 200 to $5 600 to the US$1. However, local recipients of money through MTAs will only receive payments in Zimbabwe dollars at the ruling auction rate or the diaspora rate whichever is higher.
The diaspora rate falls short of the parallel market rate of around $7 500 to the greenback, hence forex receipts through Homelink might slacken. The governor has promised to come hard on parallel forex market dealings and to enact tighter controls on the forex auction market. That noted, the parallel market might move deeper underground at an even higher price as the business becomes more risky aided by demand and supply constraints with current demand failing to meet supply.
Non-resident Zimbabweans were given incentives to invest in Zimbabwe with their free funds treated as any other foreign investment enhanced by early remittance of dividends. With more patriotism coming in from those in the diaspora, forex inflows might improve. Having said that, there is no quick-fix to the country’s economic woes. Tightening fiscal policy further should go a long way towards restoring long-term macroeconomic balance.
In conclusion, The mid-term monetary policy statement review demonstrates the determination of the authorities to deal with the current quagmire Zimbabwe is currently reeling under. Without any significant external financial support, it is unlikely that any government initiatives (however well intended) will be sufficient to turn the economy.
The governor, through broad-based consultation locally and abroad has given a bevy of incentives to the international community as well as Zimbabweans in the diaspora to invest in the country as they form an integral component in the country’s economic revival equation. The governor once again called for a shift in the mindsets of the people for the turnaround to work.